Employment Contracts Part II: What to Include
This is the second part of a two-part introduction to employment contracts for start-up companies. Part I (Employment Contract: Put it in Writing) detailed the general function of employment contracts and emphasized the importance of early adoption of written employment contracts in order to establish the essential terms of the employment agreement between the employer and employee in order to reduce the possibility and impact of future dispute. This Part II explores in greater detail some practical considerations of what should be included in these written employment contracts for early-stage growth or start-up companies.
Employment agreements used by start-up companies should be kept relatively simple. This is because of the anticipated change in nature and character of the work required from early-hire employees as well as the need for the company to maintain a flexible structure that will allow it to grow most effectively and efficiently. As a start-up company grows, new experienced executives will be hired to advance the company’s goals, which may result in diminished or changed responsibilities of initial employees. For this reason, the description of job duties in employment contracts should be kept as general as possible. The contract should also state that because of the company’s anticipated growth, the responsibilities, job title, and position of the employee may change from time to time. Clearly stating this will help a company avoid a constructive dismissal action because the contract provides the company the power to make these changes from time to time.
Furthermore, employment contracts should avoid specifying vacation policies or benefit plans as these are likely to change over time. The contract should also explicitly incorporate by reference the separate agreements that form part of the contract for employment, including the stock option agreement, share subscription agreement, non-disclosure and non-competition agreements and any assignment of technology (as applicable).
Unless terminated for cause, when an employee is terminated, the company must pay the employee a certain sum, called notice. In Canada, the length of the notice period and therefore the amount of severance owed to that employee is established by two legal regimes. First, the various provincial Employment Standards Code legislation provide for a minimum amount of notice, which is dependent on the duration of employment. Second, and usually more important, are notice amounts established by common law (i.e., judge made law), which are regularly much higher than the minimum notice periods established by legislation—the basis of which are the judge’s estimation of what is provided for under the employment contract. Since this basis is contractual, an explicit provision in the employment contract that sets out the proper notice period and severance amounts will remove this discretion from the courts and give the company greater certainty, thus reducing risk.
Non-competition provisions serve to prevent employees from working for competitors and passing on intellectual property and know-how to competitors. These provisions are theoretically enforceable in Canada but are subject to restrictions that make them of limit use. This is because courts place a high value on ensuring individuals are not denied the opportunity to work for a living. That said, non-competition provisions can be useful if their scope is limited geographically, temporally, and with respect to job descriptions and specific competitors. By narrowing the scope of the non-compete, courts are more likely to find that the covenant allows the former employee ample alternative employment in their specialization without offending the covenant.
Often, a more effective contractual method of preventing employees from using company intellectual property and know-how to compete with the company is through the use of non-solicitation provisions. These provisions have the effect of barring former employees from contacting and soliciting the company’s current employees, investors, customers, business partners, and suppliers in connection with a competing business. While non-solicitation provisions are more likely to be enforceable than non-competition provisions, they may also be struck down if a court finds them too broad—this usually happens when the provision has the effect of significantly restricting an employee’s ability to find employment in his or her specialized field. Again, limiting the scope of the covenant will increase the probability that it will be found acceptable. First, this can be done by limiting the duration to one year or less. Second, a company should consider who the restrictive covenant applies to. By limiting the application of the provision to only contacts that the employee had contact with during his or her employment at the company, the courts are more likely to find that this is an appropriate application of non-solicitation to protect the companies interests and not used instead to prevent the employee from obtaining future employment. Finally, the non-solicitation provision should be clearly differentiated from the non-competition agreement because in the event that the latter is struck down, the former may fall with it if it is not distinct and separable. Additionally, a severability clause should be included in the contract so that in the event one clause is found void, the remainder of the contract will survive and remain in force.
Intellectual Property Ownership
There is a general expectation that employees will create valuable products and ideas at all times when employed by a start-up. Of particular relevance in the context of employment contracts are patents, copyright, and trade secrets.
First, any invention, whether or not potentially subject to patent protection, is presumed by law to be the property of the inventor employee; however, this presumption can be rebutted if the company can show that: (1) a contract exists between the parties that stipulates otherwise; (2) the employee is a senior officer or fiduciary of the company and the invention directly relates to the business engaged in by the company; or (3) the employee was engaged specifically for the purpose of inventing or innovating. Companies be proactive and take measures to avoid these future disputes. This is best done by contractually characterizing invention ownership and including contractual obligations for employees’ assignment of rights and administrative duties related to patents and patent applications.
Second, unlike inventions subject to patent protection, products that are subject to copyright protection are presumed to be the property of the company employer, not the employee, provided the product was created during the course of employment. There is, however, risk that an employee will claim that work was performed outside of employment on personal time or that the product was developed, or partially developed, prior to the commencement of employment. To avoid this sort of dispute, a company should consider obtaining broad rights to all inventions and works developed by employees and related to the employer’s business. A company may also wish to include a requirement for the employee to disclose any innovations created to allow for timely determination of ownership and to chart the course for desired intellectual property protection.
Finally, though trade secrets are not technically recognized as a form of intellectual property in Canada, this information is often the most important type of information for stat-ups that requires protection. This is the information that an employee obtains only as a direct result of employment with the company, which can include both business and technical data. The common law will generally allow a company to prevent an employee from disclosing or using a trade secret if it can show that the information is a trade secret and the employee owes a duty of confidence to the employer. This duty of confidence arises automatically if the employee is a fiduciary (director or officer), but may also be found to exist if a lower level employee had information that would make the company vulnerable to disclosure. Rather than relying on the courts to make such determination, a company should include in its employment agreement or non-disclosure agreement (signed contemporaneously with the employment agreement) a duty of confidence on its employees. These restrictions should be limited in scope to only information that is special or peculiar to the company’s business because overly broad restrictions on disclosure may be struck down by a court and held unenforceable as restraint on trade.
For more information on particulars related to employment contracts and protecting your company’s interests and property, please contact the BLG Business Venture Clinic. One of the Clinic’s student will gladly detail the above and further considerations for drafting employment contracts and the ancillary agreements that form the contract for employment.
Ryan Logan is a 2018 JD Candidate at the University of Calgary and the University of Houston.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.